If It Ain't Broke…New Jersey's Income Tax Makes Dollars and Sense

By Mary E. Forsberg

FOREWORD

Most people probably would agree that we need taxes at some level to pay for the things we want government to do. We could disagree on what to tax, how much and who-not to mention how best to use the money raised through taxes. But there is enough common ground for a reasoned discussion of such issues. There probably is little point in having an argument over whether taxes are “good” or “bad.” Those who would oversimplify matters to that extent are unlikely to bring many more over to their side. The reality is that taxes are a tool; like any tool they need to be used wisely.

That said, New Jersey’s tax structure is an unqualified mess. The state relies far too heavily on local property taxes, a levy based on the value of someone’s home and land and often unrelated to actual ability to pay. Attempts over the years to put the system into better balance have sometimes made progress. But they also have foundered on political rocks and other times been reversed in favor of short-term fixes with unfortunate long-term consequences.

It’s time to get serious. And maybe that is happening. As this was written, the Legislature was meeting in special session, having been directed by Gov. Jon S. Corzine to fundamentally reshape the ways New Jersey handles its finances. It is our hope that this report will become part of the debate, indeed that it will help to shape the debate so that progressive principles can guide the path to a new New Jersey when it comes to economic justice and investing in the future.

Simply put, the state income tax must continue to play an important role in New Jersey’s overall tax system. It is a fair tax, and can be made more so. It is a productive tax, and can be made more so. But it also is a tax that often is misunderstood and misrepresented. There is much that needs to be explained and clarified about a levy that began 30 years ago and without which New Jersey would surely be in even worse shape than it is today.

Over its nine years of existence, New Jersey Policy Perspective has written extensively about taxes in New Jersey and how to devise a structure that works best for the most people while providing enough money for what needs to be done. Much of this work was done by Research Director Mary E. Forsberg, who came to NJPP five years ago after 14 years with the state Office of Legislative Services. Earlier this year, she wrote a report on the state sales tax to which this report on the state income tax serves as a companion. Together, along with other work over the years, they put New Jersey’s revenue-raising system in what we believe is helpful perspective.

This report has a premise, which it explains and defends: progressive taxation makes sense. Long before there were income taxes, influential people advocated the underlying concept of progressivity. In 1776, the economist Adam Smith wrote in his classic book The Wealth of Nations:

“when the toll upon carriages of luxury…is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, wagons, etc., the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor, by rendering cheaper the transportation of heavy goods to all different parts of the country.”

An explanation can also be found in the Bible, Luke Chapter 21:

“When he looked up he saw some wealthy people putting their offerings into the treasury and he noticed a poor widow putting in two small coins. He said, ‘I tell you truly, this poor widow put in more than all the rest; for those others have all made offerings from their surplus wealth, but she, from her poverty, has offered her whole livelihood.”

Those words mean as much today as they did back then. As New Jersey fashions a tax system that works for the future we would do well to follow them.